Berkshire Hathaway (ticker: BRKb) made a significant investment of approximately $735 million in Snowflake (SNOW) during the company's initial public offering (IPO) in September 2020. The IPO price per share was set at $120.
Snowflake, a prominent player in the cloud software industry, has experienced a decline of 5.7% in its stock price, trading at $122.95 as of Thursday. Furthermore, the stock has dropped around 70% since reaching a high of over $400 in November 2021. During this period, the overall software sector has decreased by approximately 45%.
At the time of the IPO, Berkshire purchased 6.1 million shares of Snowflake. The stock price more than doubled on its first day of trading, resulting in a profit of approximately $1.7 billion for Berkshire. However, the current value of the stake stands at around $750 million. Had Berkshire invested in the S&P 500 instead, they would have achieved a 16% return on their investment since the Snowflake IPO.
This investment in Snowflake is atypical for Berkshire, given CEO Warren Buffett's lack of expertise in the software sector and his aversion to buying IPOs and overvalued stocks.
It is believed that Todd Combs, a Berkshire investment manager, played a key role in spearheading this investment. Comments made by Snowflake CEO Frank Slootman during the IPO indicated that Combs was extensively involved in discussions. Combs, along with Ted Weschler, manages about 10% of Berkshire's equity portfolio, which exceeds $300 billion. The remaining 90% is overseen by Buffett.
The appealing aspects of the Snowflake deal might have prompted Berkshire to seize the opportunity, considering the immense investor demand for software stocks during the IPO. Interestingly, as per Berkshire's reported equity holdings in September 2022, they have not sold any Snowflake stock since the IPO.
As of now, Berkshire has not provided any immediate comment regarding this investment.
Snowflake: A Valuable but Unprofitable Software Stock
Snowflake, a software company, has emerged as one of the most highly valued stocks in the industry since its IPO. Its initial valuation of $90 billion exceeded 100 times its sales in the fiscal year that concluded in January 2021.
Despite experiencing a decline, Snowflake's current valuation stands at approximately $45 billion. This still represents over 20 times the projected sales of $2 billion for the ongoing fiscal year, which is set to conclude this month. In addition, it is valued at around 15 times the anticipated sales for the fiscal year ending in January 2024. In comparison, industry leader Salesforce (CRM) is valued at less than five times its sales.
Similar to many other software companies, Snowflake operates at a loss based on generally accepted accounting principles (GAAP). However, the company focuses on non-GAAP financials that exclude substantial employee stock compensation. Despite this fact, it is interesting to note that Berkshire Hathaway holds shares of Snowflake, considering Warren Buffett's vocal criticism of the tech industry's practice of disregarding stock compensation as an expense due to it not being paid in cash.
Snowflake is not the only stock in Berkshire Hathaway's portfolio to experience difficulties. Apple (AAPL), for instance, has seen a 30% decline from its peak over the past year, with its shares currently priced at $127. Nevertheless, Berkshire Hathaway still holds a paper profit of $80 billion on its Apple investment, having acquired approximately 900 million shares at a price of less than $40 per share. On the other hand, newer investments like Paramount Global (PARA), Citigroup (C), and HP (HPQ) are currently below Berkshire Hathaway's cost, while older holdings such as General Motors (GM) and Amazon.com (AMZN) have also suffered significant losses in the past year.
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